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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File Number 0-19291
CORVEL CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 33-0282651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1920 MAIN STREET, SUITE 1090, IRVINE, CALIFORNIA 92614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 851-1473
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of June 2, 1997 there were 4,242,000 shares of Common Stock
outstanding.
The Registrant does not have different classes of Common Stock and as
of June 2, 1997, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates was $74,071,000, based upon the closing sale
price of such stock on that date. For purposes of such calculation, only
executive officers, board members, and beneficial owners of more than 10% of the
Company's outstanding Common Stock are deemed to be affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on or about August 7, 1997, as filed with the
Commission pursuant to Regulation 14A, are incorporated by reference in Part III
of this Report.
Portions of the Registration Statement filed with the Commission on
Form S-1 (SEC File No. 33-40629), the Company's Annual Reports on Form 10-K for
the fiscal years ended March 31, 1996, March 31, 1995, March 31, 1994, March 31,
1993 and March 31, 1992, and the Company's filing on Form 8-K on February 28,
1997, are incorporated by reference in Part IV of this Report.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor for forward-looking statements. This Annual Report contains
forward-looking statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934. The Company's actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors described under "Cautionary Statement Regarding Forward-Looking
Statements" and elsewhere in this Annual Report. These factors should be
considered by investors in the Company's securities.
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CORVEL CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
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This Annual Report on Form 10-K may contain forward-looking statements
that involve risks and uncertainties. These statements may differ materially
from actual future events and results of the Company. Please refer to the "Risk
Factors" section of Form 10-K which identify some important risk factors that
could cause actual results of the Company to differ from those contained in any
forward-looking statements.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
CorVel Corporation ("CorVel" or the "Company") is an independent
nationwide provider of medical cost containment and managed care services
designed to address the escalating medical costs of workers' compensation and
other healthcare benefits, primarily coverage under group health and auto
policies. The Company's services include automated medical fee auditing, early
intervention, utilization review, medical case management, vocational
rehabilitation services, and independent medical examinations. Such services are
provided to insurance companies, third-party administrators ("TPAs"), and
self-administered employers to assist them in managing the medical costs and
monitoring the quality of care associated with health care claims.
Workers' compensation regulations vary by state and the industry is
highly fragmented. The Company's specialization in workers' compensation,
breadth of services, information management systems, and ability to offer local
services on a nationwide basis enhance its ability to compete in the workers'
compensation market. The Company believes that payors and employers impacted by
the increasing medical costs of workers' compensation will increasingly require
services and programs to manage such costs. The Company's business strategy is
to continue to expand its range of services, branch office network, and
information management capabilities to respond to this need on both a local and
national level.
INDUSTRY OVERVIEW
Workers' compensation is a statutorily defined employee benefit which
varies on a state-by-state basis. Workers' compensation laws generally require
employers to fully pay for employees' costs of medical treatment, lost wages,
legal fees and other costs associated with work-related injuries and
disabilities and, in certain jurisdictions, mandatory vocational rehabilitation.
Companies provide such coverage to their employees through either the purchase
of commercial insurance from private insurance companies, participation in
state-run funds or through self-insurance. Due to several factors, including a
general rise in the cost of health care and the fact that the employer is
required to pay all compensible medical costs of the employee without
cost-sharing by the employee, both the volume and dollar amount of workers'
compensation claims have increased in recent years, resulting in escalating
costs to employers.
While the group health insurance industry and employers have adopted
cost containment strategies such as utilization review and the use of Health
Maintenance Organizations ("HMOs") to stem the rising costs of non-workers'
compensation medical care, the workers' compensation industry has been slower to
respond to the problem of
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escalating medical costs. However, managed care in workers' compensation has
been gaining acceptance during the past several years. Since workers'
compensation benefits are mandated by law and are subject to extensive
regulation, payors and employers do not have the same flexibility to alter
benefits as they have with other health benefit programs.
Many states do not permit employers to restrict a claimant's choice of
provider, making it more difficult for employers to utilize managed care
approaches such as HMOs and Preferred Provider Organizations ("PPOs"). However,
in many states, employers have the right to direct employees to a specific
primary health care provider during the onset of a workers' compensation case,
subject to the right of the employee to change physicians after a specific
period. In addition, workers' compensation programs vary from state to state,
making it difficult for payors and multi-state employers to adopt uniform
policies to administer, manage, and control the costs of benefits. As a result,
managing the cost of workers' compensation requires approaches which are
tailored to the specified regulatory environment(s) in which the employer is
operating.
BUSINESS
The Company offers services in two general categories, provider
programs and patient management services, to assist its customers in managing
the increasing medical costs of worker's compensation, group health and auto
insurance, and monitoring the quality of care provided to claimants.
PROVIDER PROGRAMS
The Company's provider program services are designed to reduce the
price paid by its customers for medical services rendered in workers'
compensation cases. Medical cost containment services offered by the Company
include automated medical fee auditing, preferred provider services, and
retrospective utilization review.
Automated Medical Fee Auditing
Many states have adopted fee schedules which regulate the maximum
allowable fees payable under workers' compensation for procedures performed by a
variety of health treatment providers. Such schedules may also include fees for
hospital treatment. The purpose of a fee schedule is to standardize the billing
process by using uniform procedure descriptions and to set maximum reimbursement
levels for each covered service. Certain other states permit payors to pay
workers' compensation medical costs limited to usual and customary charges for
the relevant community. The Company provides automated medical fee auditing to
assist the Company's customers in verifying that the fees charged by workers'
compensation health care providers comply with state fee schedules, or are
consistent with usual and customary charges.
The Company offers its fee schedule auditing through a computerized
medical bill review service called MedCheck, which combines automated data
reporting and transmission capabilities. MedCheck consists of an on-line
computer-based information system comprised of a proprietary software program
which stores and accesses state-mandated fee schedules and licensed usual and
customary charge information. MedCheck is also being utilized for the review of
medical charges under certain non-workers' compensation insurance coverages.
With the MedCheck service, the Company is capable of:
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o Checking for provider charges which exceed charges allowable under
fee schedules or usual and customary charges, in accordance with
the requirements of the relevant jurisdiction
o Repricing provider bills to contractual PPO reimbursement levels
o Checking for duplicate billing
o Checking for billed services or procedures that are excessive,
unnecessary or unrelated to treating the particular medical
problem
o Checking for "unbundled" billings where the medical services
performed are billed in components, resulting in higher total
charges than would be the case if the services were billed in the
aggregate
o Engaging in on site processing of claims
o Sending claims data directly to carriers' databases, thereby
reducing costs due to repetitive or erroneous data entry
At March 31, 1997, the Company was providing its MedCheck services to
clients in approximately 44 states primarily through 65 branch offices. An
important element of the Company's business strategy is to introduce MedCheck to
additional existing branch offices and increase its use by current customers.
The Company plans to continue to invest in the expansion of its MedCheck medical
review software to better serve the claims processing needs of customers through
automated interfacing with its customers' computer systems.
Preferred Provider Services
PPOs are groups of hospitals, physicians and other health care
providers that offer services at pre-negotiated rates to employee groups. PPO
networks offer the employer an additional means of managing workers'
compensation costs by reducing the per-unit price of medical services provided
to employees. The Company provides its customers with access to its PPO network,
"CorCare". The CorCare network consists of 272,000 providers, 4,700 hospitals
and 59,000 ancillary facilities. Bills submitted from PPOs are identified
through the MedCheck review process, and the submitted charges are then audited
against the PPO schedule and against any applicable fee schedule or usual and
customary charges. The fee approved for payment is the lower of the submitted
charges or the lowest allowable fee identified.
Retrospective Utilization Review
The Company also offers manual fee auditing and retrospective
utilization review services, including hospital bill and chiropractic bill
auditing at a number of its branch offices. These services, performed primarily
by Company employed registered nurses, are designed to confirm that medical care
was delivered to the patient, the provider was authorized to perform the
rendered service, the care was appropriate and covered by workers' compensation,
and the charges for the delivered service were usual and customary.
PATIENT MANAGEMENT SERVICES
In addition to its provider program services, the Company offers a
range of services designed to monitor the medical necessity and appropriateness
of health care
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services provided to workers' compensation claimants and to expedite their
return to work. The Company offers these services on a stand-alone basis, or as
an integrated component of its medical cost containment services. Managed care
services offered by the Company include early intervention ("Advocacy"),
inpatient utilization review, medical case management, independent medical
examinations ("IMEs") and vocational rehabilitation.
Advocacy
Advocacy is the brand name for the Company's integrated patient
management services designed to assess and monitor a patient's diagnosis,
treatment, and return to work. During 1997, the Company continued its roll-out
of Advocacy which creates a continuum of services networking patients, providers
and payors. Delivering provider and patient profiles, healthcare episode reports
and claims status reviews to adjustors is an important feature of Advocacy and
its integration with MedCheck. The ability to deliver medical management
information to customer sites and to guide medical decision-making are important
strengths of the system.
Inpatient Utilization Review
The Company offers pre-certification and concurrent utilization review
services. The Company's pre-certification service is designed to be utilized
prior to the injured employee's admission to the hospital. Upon notification by
a claims manager or employer, a Company nurse reviews the appropriateness of the
proposed plan of care, the need for inpatient hospitalization, and the
appropriate length of stay. Under the Company's concurrent review service the
nurse reviewers monitor the medical necessity and appropriateness of the
patient's continued hospitalization through regular contact with the hospital
and the patient's physician and may identify cases that lend themselves to
alternate treatment settings or home care.
Medical Case Management
The Company offers medical case management services where the injury is
catastrophic or complex in nature, or where prolonged recovery is anticipated.
In these cases, the Company's case managers confer with the attending physician,
other providers, the patient and the patient's family to identify the
appropriate rehabilitative treatment and most cost-effective health care
alternatives, including transferring the patient from a hospital to an
alternative care facility. Case managers may coordinate the services or care
required and may arrange for special pricing of the required services.
Independent Medical Examinations
The Company arranges for IMEs to assist customers in evaluating
workers' compensation and other casualty claims. A medical examination involves
the assessment of a person's condition often for use in determining the extent
and nature of an injury. In general, a physician examines the patient and
prepares a report that describes the nature and extent of injuries, as well as
the future medical requirements. The Company provides IMEs through a network of
independent physicians. As of March 31, 1997, the Company was providing IMEs
through branch offices in eight states.
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Vocational Rehabilitation
In certain states, vocational rehabilitation is a legislated benefit of
workers' compensation which assists the employee's return to former employment
or another job function with similar economic value. The Company offers
vocational services to reduce workers' compensation costs and expedite the
injured employee's return to work.
Vocational services include work capacity assessments, job analysis,
transferable skill analysis, job modification, vocational testing, job placement
assistance, labor market surveys and retraining. After an employee sustains an
injury, the Company performs an analysis of the employee's current job and other
potential jobs which could be performed for the employer, meets with the
treating physician to determine the diagnosis and prognosis for return to work,
presents job analyses to obtain a release to return to work, develops plans for
employee training and generally monitors the employee's return to work.
Internet Based Line of Services
The Company recently announced an initiative to deliver a line of
Internet-based sevices to employers, insurance carriers and PTAs. The Company
expects to add services throughout fiscal 1998 a number of new service features,
based upon the access and timeliness of Internet-based tools. The first service
in this line will involved Internet access to the Company's network of preferred
healthcare providers, a service now available and being utilized by CorVel
clients.
The project, named "Galaxy", is intended to capitalize upon CorVel's
substantial investment in systems and software and rapidly evolving Internet
technologies. The Company's initial offerings will also include
transaction-based services. During the past two years, the Company has installed
a company wide Intranet and is currently implementing improved wide area
networking technologies. A corporate website has been established;, however,
most of the new services involve Internet connections provided on an exclusive
basis for insurance companies and major employers. The Company's existing
services are supported by relational database applications which allow direct
access from industry standard Internet browsers.
CUSTOMERS AND MARKETING
The Company's customers are workers' compensation insurers and, to a
lesser extent, TPA's and self-administered employers. Many claims management
decisions in workers' compensation are the responsibility of the local claims
office of national or regional insurers. The Company's national branch office
network has been established to enable the Company to market and offer its
services at both a local and national account level. The Company is placing
increasing emphasis on national account marketing. The marketing activities of
the Company are conducted by account executives located in key geographic areas,
and by national account executives from the corporate office. Most of the major
workers' compensation insurance carriers conduct business with the Company. None
of the Company's customers represented more than 10% of revenues in fiscal 1997.
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COMPETITION AND MARKET CONDITIONS
The health care cost containment industry is highly fragmented and
competitive. The intensity of competition can be expected to increase. The
Company's primary competitors in the workers' compensation market are several
large insurance carriers which offer one or more services similar to those
offered by the Company, HMOs and numerous independent companies, typically on a
local or regional basis. The Company also competes with national and local firms
specializing in utilization review and with major insurance carriers and TPAs
which have implemented their own internal utilization review services. Many of
the Company's competitors are significantly larger and have greater financial
and marketing resources than the Company. There can be no assurance that the
Company will continue to maintain its existing performance, or be successful
with any new products or in any new geographical markets it may enter. Moreover,
the Company's customers may establish the in-house capability of performing
services offered by the Company.
Legislative reforms in some states permit employers to designate health
plans such as HMOs and PPOs to cover workers' compensation claimants. Because
many health plans have the capacity to manage health care for workers'
compensation claimants, such legislation may intensify competition in the market
served by the Company. Within the past few years, several states have
experienced decreases in the number of workers' compensation claims and the
average cost per claim which have been reflected in workers' compensation
insurance premium rate reductions in those states. The Company believes that
declines in workers' compensation costs in these states are due principally to
intensified efforts by payors to manage and control claim costs, to improved
risk management by employers and to legislative reforms. If declines in workers'
compensation costs occur in many states and persist over the long-term, they may
have an adverse impact on the Company's business and results of operations.
The Company competes on the basis of its specialization in workers'
compensation, breadth of services, ability to offer local services on a
nationwide basis, information management systems and independence from insurance
carriers.
GOVERNMENT REGULATION
General
Managed health care programs for workers' compensation are subject to
various laws and regulations. Both the nature and degree of applicable
government regulation vary greatly depending upon the specific activities
involved. Generally, parties that actually provide or arrange for the provision
of health care services, assume financial risk related to the provision of those
services, or undertake direct responsibility for making payment or payment
decisions for those services, are subject to a number of complex regulatory
schemes that govern many aspects of their conduct and operations.
In contrast, the management and information services provided by the
Company to its customers typically have not been the subject of regulation by
the federal government or the states. Since the managed health care field is a
rapidly expanding and changing industry and the cost of providing health care
continues to increase, it is possible that the applicable state and federal
regulatory frameworks will expand to have a greater impact upon the conduct and
operation of the Company's business.
Under the current workers' compensation system, employer insurance or
self-funded coverage is governed by individual laws in each of the 50 states and
by certain federal laws. The management and information services that make up
the Company's
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managed care program serve markets that have developed largely in response to
needs of insurers, employers and large TPAs, and generally have not been
mandated by legislation or other government action. On the other hand, the
vocational rehabilitation case management marketplace within the workers'
compensation system has been dependent upon the laws and regulations within
those states that require the availability of specified rehabilitation services
for injured workers. Similarly, the Company's fee schedule auditing services
address market needs created by certain states' enactment of maximum permissible
fee schedules for workers' compensation services. Changes in individual state
regulation of workers' compensation may create a greater or lesser demand for
some or all of the Company's services, or require the Company to develop new or
modified services in order to meet the needs of the marketplace and compete
effectively in that marketplace.
Medical Cost Containment Legislation
Historically, governmental strategies to contain medical costs in the
workers' compensation field have been generally limited to legislation on a
state-by-state basis. For example, many states have implemented fee schedules
that list maximum reimbursement levels for health care procedures. In certain
states that have not authorized the use of a fee schedule, the Company adjusts
bills to the usual and customary levels authorized by the payor. Opportunities
for the Company's services could increase as more states legislate additional
cost containment strategies. Conversely, the Company could be adversely affected
if states elect to reduce the extent of medical cost containment strategies
available to insurance carriers and other payors, or adopt other strategies for
cost containment that would not support a demand for the Company's services.
Healthcare Reform
There has been considerable discussion of healthcare reform at both the
federal level and in numerous state legislatures. Due to uncertainties regarding
the ultimate features of reform initiatives and the timing of their enactment,
the Company cannot predict which, if any, reforms will be adopted, when they may
be adopted, or what impact they may have on the Company.
Vocational Rehabilitation Legislation
During the early 1970s, the case management marketplace within workers'
compensation was dominated by the provision of medical management services. Such
services were purchased at the option of insurance carriers with little or no
support from legislative efforts within any of the states. By the mid-1970s, it
became popular for states to legislate either supportive programs for vocational
rehabilitation or, in some cases, mandatory vocational rehabilitation statutes.
SHAREHOLDER RIGHTS PLAN
During fiscal 1997, the Company's Board of Directors approved the
adoption of a Shareholder Rights Plan. The Rights Plan, which is similar to
rights plans adopted by numerous other public companies, provides for a dividend
distribution to CorVel stockholders of one preferred stock purchase "Right" for
each outstanding share of CorVel's Common Stock. The Rights are designed to
assure that all stockholders receive fair and equal treatment in the event of
any proposed takeover of the Company and to
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encourage a potential acquirer to negotiate with the Board of Directors prior to
attempting a takeover. The rights have an exercise price of $125.00 per right,
subject to subsequent adjustment. Initially, the Rights will trade with the
Company's common stock, and will not be exercisable until the occurrence of
certain takeover-related events.
Generally, the Rights Plan provides that if a person or group acquires
15% or more of the Company's Common Stock without the approval of the Board,
subject to certain exception, the holders of the rights, other than the
acquiring person or group, would, under certain circumstances, have the right to
purchase additional shares of the Company's Common Stock having a market value
equal to two times the then-current exercise price of the right. In addition, if
the Company is thereafter merged into another entity, of if 50% or more of the
Company's consolidated assets or earning power are sold, then the Right will
entitle its holder to buy common shares of the acquiring entity having a market
value equal to two times the then-current exercise price of the Right. The
Company's Board of Directors may exchange or redeem the Rights under certain
conditions.
NAME CHANGE
In October, 1991, the Company entered into an agreement with AMEV/VSB
1990 NV, a Netherlands corporation, ("AMEV"), for the sale of the Company's
interests in its former name, "FORTIS". In consideration for such sale, AMEV
paid to the Company a non-refundable, non-conditional payment of $4.0 million.
Under the terms of the agreement, however, the Company had until September 30,
1992 to cease all uses of its former name in order to provide the Company with
an "orderly phase-out" period to terminate its uses of the name and to minimize
any likelihood of confusion regarding ownership thereof among customers of the
Company or AMEV.
The Company completed its preparations for the name change by late July
1992, and on July 24, 1992, formally changed its corporate name from "FORTIS" to
"CorVel". During the quarter ended September 30, 1992, the Company recognized a
gain of $3.3 million from the AMEV payment, which was net of $700,000 in costs
to effect the name change. Prior to this time, the Company felt that it was
inappropriate to recognize any gain from the AMEV payment as the Company had no
basis upon which to reasonably estimate the cost of performing the tasks
necessary to conduct business under a different name and thereby determine the
actual gain.
MANAGED CARE RECONFIGURATION CHARGE
During the fiscal year ended March 31, 1993, the Company embarked upon
a reconfiguration of its services and the information systems to support such
services to respond to the increasing influence of state-legislated managed care
on the health care industry and because of advances in computer technology by
the Company's sole hardware vendor which made existing systems obsolete. In this
regard, the Company wrote down the net book value of its oldest Digital
Equipment Corporation VAX computers, an aggregate net book value of
approximately $1.3 million, in order to replace such equipment with DEC's new
generation computers based on the ALPHA operating platform. Such upgrading of
the Company's computer system to 64 byte processing
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capabilities also caused the obsolescence of approximately $1.0 million of then
unamortized software, which the Company also wrote off.
Also during the fiscal year ended March 31, 1993, the Company recorded
a charge of $1.0 million related to a provision to modify and upgrade management
and reimbursement systems and technology involved in the patient management
portion of the Company's managed care program. Without such charges, the Company
was unable to direct patients to preferred providers, a requirement to obtain
volume discounts from such providers. In addition, the Company's branches
incurred expenses resulting from managed care legislation which obsoleted older
service delivery methods. All but an insignificant portion of these expenditures
were incurred by the end of fiscal 1993.
EMPLOYEES
As of March 31, 1997, CorVel had approximately 1,900 employees,
including nurses, therapists, counselors and other employees. No employees are
represented by any collective bargaining unit. Management considers its
relationship with its employees to be good.
RISK FACTORS
Past financial performance is not necessarily a reliable indicator of
future performance, and investors in the Company's Common Stock should not use
historical performance to anticipate results or future period trends. The
Company's business and the market price of the Company's Common Stock is subject
to numerous risks and uncertainties. Some of those risks are described below.
Other risks are presented elsewhere in this Form 10-K. See, in particular,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
POTENTIAL ADVERSE IMPACT OF GOVERNMENT REGULATION. Many states,
including a number of those in which the Company transacts business, have
licensing and other regulatory requirements applicable to the Company's
business. Approximately half of the states have enacted laws that require
licensing of businesses which provide medical review services, such as the
Company. Some of these laws apply to medical review of care covered by workers'
compensation. These laws typically establish minimum standards for
qualifications of personnel, confidentiality, internal quality control and
dispute resolution procedures. These regulatory programs may result in increased
costs of operation for the Company, which may have an adverse impact upon the
Company's ability to compete with other available alternatives for health care
cost control. In addition, new laws regulating the operation of managed care
provider networks have been adopted by a number of states. These laws may apply
to managed care provider networks having contracts with the Company or to
provider networks which the Company may organize. To the extent the Company is
governed by these regulations, it may be subject to additional licensing
requirements, financial and operational oversight and procedural standards for
beneficiaries and providers.
Regulation in the health care and workers' compensation fields is
constantly evolving. The Company is unable to predict what additional government
regulations, if any, affecting its business may be promulgated in the future.
The Company's business may be adversely affected by failure to comply with
existing laws and regulations, failure
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to obtain necessary licenses and government approvals or failure to adapt to new
or modified regulatory requirements. Proposals for health care legislative
reforms are regularly considered at the federal and state levels. To the extent
that such proposals affect workers' compensation, such proposals may adversely
affect the Company's business and results of operations. In addition, changes in
workers' compensation laws or regulations may impact demand for the Company's
services, require the Company to develop new or modified services to meet the
demands of the marketplace or modify the fees that the Company may charge for
its services. One of the proposals which has been considered is 24-hour health
coverage, in which the coverage of traditional employer-sponsored health plans
is combined with workers' compensation coverage to provide a single insurance
plan for work-related and non-work-related health problems. Incorporating
workers' compensation coverage into conventional health plans may adversely
affect the market for the Company's services.
POSSIBLE LITIGATION AND LEGAL LIABILITY. The Company, through its
utilization management services, makes recommendations concerning the
appropriateness of providers' medical treatment plans of patients throughout the
country, and as a result, could be exposed to claims for adverse medical
consequences. The Company does not grant or deny claims for payment of benefits
and the Company does not believe that it engages in the practice of medicine or
the delivery of medical services. There can be no assurance, however, that the
Company will not be subject to claims or litigation related to the grant or
denial of claims for payment of benefits or allegations that the Company engages
in the practice of medicine or the delivery of medical services.
In addition, there can be no assurance that the Company will not be
subject to other litigation that may adversely affect the Company's business or
results of operations. The Company maintains professional liability insurance
and such other coverages as the Company believes are reasonable in light of the
Company's experience to date. There can be no assurance, however, that such
insurance will be sufficient or available in the future at reasonable cost to
protect the Company from liability which might adversely affect the Company's
business or results of operations.
COMPETITION. The Company faces competition from HMOs, PPOs, TPAs and
other managed health care companies. The Company believes that, as managed care
techniques continue to gain acceptance in the workers' compensation marketplace,
CorVel's competitors will increasingly consist of nationally focused workers'
compensation managed care service companies, insurance companies, HMOs and other
significant providers of managed care products. Legislative reforms in some
states permit employers to designate health plans such as HMOs and PPOs to cover
workers' compensation claimants. Because many health plans have the ability to
manage medical costs for workers' compensation claimants, such legislation may
intensify competition in the markets served by the Company. Many of the
Company's current and potential competitors are significantly larger and have
greater financial and marketing resources than those of the Company, and there
can be no assurance that the Company will continue to maintain its existing
clients or its past level of operating performance or be successful with any new
products or in any new geographical markets it may enter.
CHANGES IN MARKET DYNAMICS. Within the past few years, several states
have experienced decreases in the number of workers' compensation claims and the
average cost per claim which have been reflected in workers' compensation
insurance premium rate reductions in those states. The Company believes that
declines in workers' compensation costs in these states are due principally to
intensified efforts by payors to
10
<PAGE> 14
manage and control claim costs, to improved risk management by employers and to
legislative reforms. If declines in workers' compensation costs occur in many
states and persist over the long-term, they may have an adverse impact on the
Company's business and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent to a
substantial extent upon the continuing efforts and abilities of certain key
management personnel. In addition, the Company faces competition for experienced
employees with professional expertise in the workers' compensation managed care
area. The loss of, or the inability to attract, qualified employees could have a
material adverse effect on the Company's business and results of operations.
RISKS RELATED TO GROWTH STRATEGY. The Company's strategy is to continue
its internal growth and, as strategic opportunities arise in the workers'
compensation managed care industry, to consider acquisitions of, or
relationships with, other companies in related lines of business. As a result,
the Company is subject to certain growth-related risks, including the risk that
it will be unable to retain personnel or acquire other resources necessary to
service such growth adequately. Expenses arising from the Company's efforts to
increase its market penetration may have a negative impact on operating results.
In addition, there can be no assurance that any suitable opportunities for
strategic acquisitions or relationships will arise or, if they do arise, that
the transactions contemplated thereby could be completed. If such a transaction
does occur, there can be no assurance that the Company will be able to integrate
effectively any acquired business into the Company. In addition, any such
transaction would be subject to various risks associated with the acquisition of
businesses, including the financial impact of expenses associated with the
integration of businesses.
There can be no assurance that any future acquisition or other
strategic relationship will not have an adverse impact on the Company's business
or results of operations. If suitable opportunities arise, the Company
anticipates that it would finance such transactions, as well as its internal
growth, through working capital or, in certain instances, through debt or equity
financing. There can be no assurance, however, that such debt or equity
financing would be available to the Company on acceptable terms when, and if,
suitable strategic opportunities arise.
During the past fiscal year, the Company has made efforts to increase
its presence and revenue in the group health market with moderate success.
Managed care in this market is more mature than managed care in workers'
compensation and has numerous large competitors, primarily HMOs. The Company has
limited experience in the group health market. There can be no assurance that
the Company will be successful in this market.
Certain aspects of the Company's business are dependent upon its
ability to store, retrieve, process and manage data and to maintain and upgrade
its data processing capabilities. Interruption of data processing capabilities
for any extended length of time, loss of stored data, programming errors or
other computer problems could have a material adverse effect on the Company's
business and results of operations. In addition, the company's results of
operations are highly dependent upon the ability of management to expeditiously
retrieve and analyze financial information from its nation-wide branch network.
The company is currently in the process of installing new company-wide
management information software and there can be no assurance that the
installation of this new system will proceed according to plan.
11
<PAGE> 15
In addition, the Company expects that a considerable amount of its
future growth will depend on its ability to process and manage claims data more
efficiently and to provide more meaningful healthcare information to customers
and payors of healthcare. There can be no assurance that the Company's current
data processing capabilities will be adequate for its future growth, that it
will able to efficiently upgrade its systems to meet future demands, or that the
Company will be able to develop, license or otherwise acquire software to
address these market demands as well or as timely as its competitors.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock following this offering may be highly volatile. Factors such as
variations in the Company's revenues, earnings and cash flow, general market
trends in the workers' compensation managed care market, and announcements of
innovations by the Company or its competitors could cause the market price of
the Common Stock to fluctuate substantially. Specifically, the year-to-year
percentage growth in operating results for the Company's two most recently
completed fiscal years was lower than the growth rates historically experienced
by the Company. The Company's slower growth rate in those two fiscal years was
partially attributable to a reduction in the growth rate of health care
expenditures nationally, contributing to a reduction in the growth of claims
processed by the Company. There can be no assurance that the Company's growth
rate in the future, if any, will be at or near historical levels.
In addition, the stock market has in the past experienced price and
volume fluctuations that have particularly affected companies in the health care
and managed care markets resulting in changes in the market price of the stock
of many companies which may not have been directly related to the operating
performance of those companies.
IMPORTANCE OF INTELLECTUAL PROPERTY RIGHTS. The Company has made
significant investments in the development and maintenance of its proprietary
software systems and data. The Company relies largely on its own security
systems, confidentiality procedures and employee nondisclosure agreements to
maintain the confidentiality and security of its proprietary information.
Unauthorized access by third parties to the Company's information systems, the
existence of computer viruses in the Company's data or software and
misappropriation of the Company's proprietary information may have a material
adverse effect on the Company's business and results of operations.
ITEM 2. PROPERTIES.
The Company's principal executive office is located in Irvine,
California in approximately 2,300 square feet of leased space. The lease expires
in August 1997. The Company leases its branch offices, which range in size up to
approximately 9,000 square feet. The lease terms for the branch offices range
from monthly to five years. The Company believes that its facilities are
adequate for its current needs and that suitable additional space will be
available as required.
12
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not result
in any payment that, in the aggregate, would be material to the financial
position or financial operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the
quarter ended March 31, 1997.
13
<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol CRVL. The quarterly high and low sales prices for the Company's
Common Stock for fiscal years 1996 and 1997 as reported by Nasdaq are set forth
below for the periods indicated.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1996:
Quarter Ended June 30, 1995: $28 1/2 $19 7/8
Quarter Ended September 30, 1995: 32 21
Quarter Ended December 31, 1995: 38 1/8 29 1/4
Quarter Ended March 31, 1996: 38 27 1/2
FISCAL YEAR ENDED MARCH 31, 1997:
Quarter Ended June 30, 1996: $36 1/4 $28 1/2
Quarter Ended September 30, 1996: 35 3/4 26 1/2
Quarter Ended December 31, 1996: 31 24 1/2
Quarter Ended March 31, 1997: 30 5/8 24
</TABLE>
The last sales price for the Company's Common Stock as reported by
NASDAQ on June 2, 1997 was $27.00. As of June 2, 1997, there were 425 holders of
record of the Company's Common Stock. The Company has never paid any cash
dividends on its Common Stock and has no current plans to do so.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company appears in a
separate section of this Annual Report on Form 10-K on page F-1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results
of Operations appears in a separate section of this Annual Report on Form 10-K
beginning on page F-2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and schedule, as listed
under Item 14, appear in a separate section of this Annual Report on Form 10-K
beginning on page F-5 and S-1, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
14
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The sections titled "Directors and Nominees," "Executive Officers of
the Company," and "Compliance with Section 16(a) of the Exchange Act" appearing
in the Company's Definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section titled "Executive Compensation and Related Information",
except as stated therein, appearing in the Company's Definitive Proxy Statement
for the 1997 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section titled "Principal Stockholders" appearing in the Company's
Definitive Proxy Statement for the 1997 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section titled "Certain Transactions" appearing in the Company's
Definitive Proxy Statement for the 1997 Annual Meeting of Stockholders is
incorporated herein by reference.
15
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(1)(A) CONSOLIDATED FINANCIAL STATEMENTS:
The Company's consolidated financial statements appear in a separate
section of this Annual Report on Form 10-K beginning on the pages referenced
below:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-5
Consolidated Statements of Income for the Years Ended
March 31, 1995, 1996, and 1997 F-6
Consolidated Balance Sheets as of March 31, 1996 and 1997 F-7
Consolidated Statements of Stockholders' Equity for
the Years Ended March 31, 1995, 1996, and 1997 F-8
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1995, 1996, and 1997 F-10
Notes to Consolidated Financial Statements F-11
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULE:
The Company's financial statement schedule appears in a separate
section of this Annual Report on Form 10-K beginning on the page referenced
below. All other schedules have been omitted as they are not applicable, not
required or the information is included in the consolidated financial statements
or the notes thereto.
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<S> <C>
II -- Valuation and Qualifying Accounts S-1
</TABLE>
(3) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Incorporated herein by reference to Exhibit 3.1 to
Company the Company's Registration Statement on Form S-1
Registration No. 33-40629.
Incorporated herein by reference to Exhibit 3.2 to
3.2 Bylaws of the Company the Company's Registration Statement on Form S-1
Registration No. 33-40629.
</TABLE>
16
<PAGE> 20
EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.1 Lease Agreement of the Company's executive Incorporated herein by reference to Exhibit 10.1 to
office in Irvine, California the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1993.
10.2 Lease Agreement of the Company's office in Incorporated herein by reference to Exhibit 10.5 to
Richmond, Virginia the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.3 Nonqualified Stock Option Agreement Incorporated herein by reference to Exhibit 10.6 to
between V. Gordon Clemons, the Company and the Company's Registration Statement on Form S-1
North Star together with all amendments Registration No. 33-40629.
and addendums thereto
10.4 Supplementary Agreement between V. Gordon Incorporated herein by reference to Exhibit 10.7 to
Clemons, the Company and North Star the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.5 Amendment to Supplementary Agreement Incorporated herein by reference to Exhibit 10.5
between Mr. Clemons, the Company and to the Company's Annual Report on Form 10-K for the
North Star fiscal year ended March 31, 1992.
10.6 Restated 1988 Executive Stock Option Incorporated herein by reference to Exhibit 10.6 to
Plan, as amended the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1995.
10.7 Form of Notice of Grant of Stock Option Incorporated herein by reference to Exhibit 10.7 to
Under the Restated 1988 Executive the Company's Annual Report on Form 10-K for the
Stock Option fiscal year ended March 31, 1994.
10.8 Form of Stock Option Agreement under Incorporated herein by reference to Exhibit 10.8 to
the Restated 1988 Executive Stock the Company's Annual Report on Form 10-K for the
Option Plan fiscal year ended March 31, 1994.
</TABLE>
17
<PAGE> 21
EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.9 Form of Notice of Exercise under the Incorporated herein by reference to Exhibit 10.9 to
Restated 1988 Executive Stock Option Plan the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994.
10.10 Employment Agreement of V. Gordon Clemons Incorporated herein by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.11 Restated 1991 Employee Stock Purchase Incorporated herein by reference to Exhibit 10.11 in
Plan, as amended the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1995.
10.12 Registration Rights Agreement Incorporated herein by reference to Exhibit 10.17
to the Company's Registration on Form S-1
Registration No. 33-40629.
10.13 Form of Indemnification Agreement Incorporated herein by reference to Exhibit 10.19
to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.14 Fidelity Master Plan for Savings Incorporated herein by reference to Exhibits 10.16
and Investment, and amendments and 10.16A to the Company's Registration Statement
on Form S-1 Registration No. 33-40629.
10.15 Stock Purchase and Subsidiary Transfer Incorporated herein by reference to Exhibit 10.18
Agreement to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.16 North Star Indemnification Agreement Incorporated herein by reference to Exhibit 10.20
to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
</TABLE>
18
<PAGE> 22
EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.17 Agreement between the Company and Incorporated herein by reference to Exhibit 10.19
AMAEV/VSB 1990 NV to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992.
10.18 Daniel Davis Severance Arrangement Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1993.
10.19 Form S-3 Registration Agreement with Incorporated herein by reference to the Company's
North Star Universal, Inc. Annual Report on Form 10-K for the fiscal year
ended March 31, 1993.
10.20 Shareholder Rights Plan Incorporated herein by reference to the Company's
Form 8-K filed on February 28, 1997.
11.1 Computation of Earnings Per Share Attached.
21.1 Subsidiaries of the Company Attached.
23.1 Consent of Independent Auditors Attached.
27 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on February 28, 1997 in
connection with the approval and adoption of the Shareholder Rights Plan.
19
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CORVEL CORPORATION
Date: June 27, 1997 By: /s/ V. GORDON CLEMONS
-----------------------------
V. Gordon Clemons
Chairman and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ V. Gordon Clemons Chairman and President June 27, 1997
- --------------------------
V. Gordon Clemons
/s/ Richard J. Schweppe Chief Financial Officer and June 27, 1997
- -------------------------- Accounting Officer
Richard J. Schweppe
/s/ Thomas R. Brown Director June 27, 1997
- --------------------------
Thomas R. Brown
/s/ Peter E. Flynn Director June 26, 1997
- --------------------------
Peter E. Flynn
/s/Steven J. Hamerslag Director June 27, 1997
- --------------------------
Steven J. Hamerslag
/s/ Jeffrey J. Michael Director June 27, 1997
- --------------------------
Jeffrey J. Michael
</TABLE>
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the five years ended March
31, 1997, have been derived from the Company's audited consolidated financial
statements. The following data should be read in conjunction with the Company's
Consolidated Financial Statements, the related notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
following amounts are in thousands, except per share data.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $ 61,846 $ 80,619 $ 95,783 $ 109,052 $ 121,704
Costs and Expenses:
Cost of revenues 52,788 67,331 78,950 88,937 99,323
General and administrative 4,899 6,057 7,186 8,106 8,645
Net gain from sale of name 3,300
Managed care reconfiguration charge (3,300)
--------- --------- --------- --------- ---------
57,687 73,388 86,136 97,043 107,968
--------- --------- --------- --------- ---------
Income before income taxes 4,159 7,231 9,647 12,009 13,736
Income tax provision 1,625 2,821 3,762 4,684 5,220
--------- --------- --------- --------- ---------
Net income $ 2,534 $ 4,410 $ 5,885 $ 7,325 $ 8,516
========= ========= ========= ========= =========
Net income per common and common
equivalent share $ .61 $ 1.01 $ 1.30 $ 1.57 $ 1.82
========= ========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding 4,128 4,369 4,542 4,674 4,689
Return on beginning of year equity 15.5% 21.7% 21.5% 20.5% 18.8%
BALANCE SHEET DATA AS OF MARCH 31, 1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
Cash and cash equivalents $ 3,471 $ 8,393 $ 13,211 $ 17,113 $ 15,665
Accounts receivable, net 11,235 13,211 15,868 18,394 22,294
Working capital 11,667 17,579 24,085 30,781 29,870
Total assets 25,314 34,624 43,965 53,984 58,824
Retained earnings 1,290 5,700 11,585 18,910 27,426
Total stockholders' equity 20,357 27,325 35,754 45,311 46,087
</TABLE>
F-1
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company derives the majority of its revenues from providing patient
management and provider program services to payors of workers' compensation
benefits and health insurance benefits. Patient management services include
early intervention, utilization review, medical case management, vocational
rehabilitation, and independent medical examinations. Provider program revenues
include fee schedule auditing (MedCheck), hospital bill auditing, and preferred
provider referral services. The percentages of revenues attributable to patient
management and provider program services for the fiscal years ended March 31,
1995, 1996, and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Patient management services 53.9% 52.0% 51.7%
Provider program services 46.1% 48.0% 48.3%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of revenues represented by certain items reflected in the Company's consolidated
statements of income. The Company's past operating results are not necessarily
indicative of future operating results.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 82.4 81.6 81.6
General and administrative 7.5 7.4 7.1
Income before income taxes 10.1 11.0 11.3
Net income 6.1 6.7 7.0
</TABLE>
Years Ended March 31, 1995, 1996 and 1997
Revenues for fiscal 1996 increased by 14% to $109.1 million from $95.8
million in fiscal 1995, an increase of $13.3 million. Most of this growth came
from provider program services, which grew 19% from fiscal year 1995 to fiscal
1996, due both to growth in the number of service sites along with growth in PPO
revenues. Patient management revenues grew at a lesser rate primarily due to
nominal growth in the Company's growth in the Company's operations in the
western portion of the United States.
Revenues for fiscal 1997 increased by 12% to $121.7 million from $109.1
million in fiscal 1996, an increase of $12.6 million. Revenues from provider
program services grew $6.4 million, from $52.4 million in fiscal 1996 to $58.8
million in fiscal 1997, an increase of 12%. Revenues from patient management
services grew $6.2 million, from $56.7 million in fiscal 1996 to $62.9 million
in fiscal 1997, an increase of 11%.
F-2
<PAGE> 26
The Company's cost of revenues consists primarily of salaries and
related benefits, rent, telephone expenses and costs related to the Company's
computer operations including depreciation and amortization. Costs of revenues
increased to $99.3 million in fiscal 1997, from $79.0 million in fiscal 1995 and
$88.9 million in fiscal 1996. Cost of services as a percentage of revenues
decreased from 82.4% in fiscal 1995 to 81.6% in fiscal 1996 and fiscal 1997.
Part of this decline from fiscal 1995 to fiscal 1996 and fiscal 1997 in
cost of revenues as a percentage of revenues is due to the gradual change in the
Company's revenue mix towards provider program revenues, primarily PPO revenues,
where the cost of services is less than that associated with its more labor
intensive patient management business. Additionally, while the Company continued
to add personnel to support its revenue growth, it realized greater economies of
scale with its expanded branch operations. The Company's gross profit percentage
has increased during the past two fiscal years as compared to fiscal 1995.
However, there is no guarantee that this trend will continue should the Company
pursue a strategy of reducing price in order to obtain greater market share or
if competition causes pricing pressure in the industry.
General and administrative expense increased from $7.2 million in
fiscal 1995 and $8.1 million in fiscal 1996 to $8.6 million in fiscal 1997
primarily due to increased MIS staff and national marketing staff. However,
general and administrative expenses declined as a percentage of revenues from
7.5% in fiscal 1995 and 7.4% in 1996 to 7.1% in fiscal 1997, as the Company was
able to support greater revenue growth without a proportionate increase in
general and administrative expenses.
In fiscal 1993, the Company recognized a gain of $3.3 million, net of
associated costs, from the sale to a third party of its rights to its former
name, "FORTIS". The Company deferred recognition of the gain until the Company
could reasonably estimate the cost of performing the changes necessary to
conduct business under a different name. During fiscal 1993, the Company
provided for a $3.3 million managed care reconfiguration charge. This charge
included approximately $1.0 million to modify and upgrade management and
reimbursement systems and technology involved in the patient management portion
of the Company's managed care program and $2.3 million to replace obsolete
hardware and software systems. Substantially all of these costs were incurred
prior to the end of fiscal 1993. The effect of these costs enabled the Company
to compete effectively in the managed care market despite changes mandated by
state legislation and technological changes in computer hardware and software
systems.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures
primarily from cash flow from operations. During fiscal 1997, net working
capital decreased by $2.2 million from $30.8 million at March 31, 1996 to $28.6
million at March 31, 1997. This decline was due to the repurchase of 357,000
shares of the Company's stock for $9.5 million during fiscal year ending March
31, 1997. These repurchases represented 8% of the Company's common stock. As of
March 31, 1997, the Company had $15.7 million in cash, invested primarily in
short-term highly-liquid investments with maturities of 90 days or less.
The Company has historically required substantial capital to fund the
growth of its operations, particularly working capital to fund the growth in
accounts receivable. The Company believes, however, that the cash balance at
March 31, 1997 along with anticipated internally generated funds will be
sufficient to meet the Company's expected cash requirements for at least the
next twelve months.
F-3
<PAGE> 27
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CorVel Corporation
We have audited the accompanying consolidated balance sheets of CorVel
Corporation as of March 31, 1996 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended March 31, 1997. These financial statements and this
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CorVel Corporation at March 31, 1996 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule when
considered in relationship to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
May 8, 1997
F-4
<PAGE> 28
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
------------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES $ 95,783,000 $109,052,000 $121,704,000
COSTS AND EXPENSES
Cost of revenues 78,950,000 88,937,000 99,323,000
General and administrative 7,186,000 8,106,000 8,645,000
------------ ------------ ------------
86,136,000 97,043,000 107,968,000
------------ ------------ ------------
Income before income taxes 9,647,000 12,009,000 13,736,000
Income tax provision 3,762,000 4,684,000 5,220,000
------------ ------------ ------------
NET INCOME $ 5,885,000 $ 7,325,000 $ 8,516,000
============ ============ ============
Net income per common and common equivalent share $ 1.30 $ 1.57 $ 1.82
============ ============ ============
Weighted average common and common equivalent
shares outstanding 4,542,000 4,674,000 4,689,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 29
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
----------------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 17,113,000 $ 15,665,000
Accounts receivable (less allowance for doubtful accounts of $1,268,000
in 1996 and $1,686,000 in 1997) 18,394,000 22,294,000
Prepaid taxes and expenses 545,000 124,000
Deferred income taxes 2,032,000 1,746,000
------------ ------------
Total current assets 38,084,000 39,829,000
------------ ------------
Property and equipment, net 11,468,000 13,100,000
Other assets 4,432,000 5,895,000
------------ ------------
$ 53,984,000 $ 58,824,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable $ 3,057,000 $ 6,603,000
Accrued liabilities 4,246,000 4,630,000
------------ ------------
Total current liabilities 7,303,000 11,233,000
------------ ------------
Deferred income taxes 1,370,000 1,504,000
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.0001 par value: 20,000,000 shares authorized; 4,593,675
and 4,697,853 shares issued and outstanding in 1996 and 1997, respectively
Paid-in Capital 26,401,000 28,122,000
Treasury Stock, at cost (no shares in 1996, 357,000 shares in 1997) (9,461,000)
Retained Earnings 18,910,000 27,426,000
------------ ------------
Total stockholders' equity 45,311,000 46,087,000
------------ ------------
$ 53,984,000 $ 58,824,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 30
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
Common
stock and
Common paid in Treasury Treasury
stock - shares capital shares shares - cost
-------------- ------------ -------- -------------
<S> <C> <C> <C> <C>
Balance - March 31, 1994 4,071,195 $ 21,625,000 $
Stock issued under employee stock
purchase plan 19,634 374,000
Stock issued under employee stock option plan
and related income tax benefits 147,421 2,170,000
Net income
--------- ------------ --------- ------------
Balance - March 31, 1995 4,238,250 24,169,000
Stock issued under employee
stock purchase plan 18,384 444,000
Stock issued under employee stock option plan
and related income tax benefits, net of
shares repurchased upon exercise 337,041 1,788,000
Net income
--------- ------------ --------- ------------
Balance - March 31, 1996 4,593,675 26,401,000
Stock issued under employee stock
purchase plan 23,039 536,000
Stock issued under employee stock option plan
and related income tax benefits 81,139 1,185,000
Purchase of common stock (357,000) (9,461,000)
Net income
--------- ------------ --------- ------------
Balance - March 31, 1997 4,697,853 $ 28,122,000 (357,000) $ (9,461,000)
========= ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 31
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
YEARS ENDED MARCH 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
------------ -------------
<S> <C> <C>
Balance - March 31, 1994 $ 5,700,000 $ 27,325,000
Stock issued under employee stock
purchase plan 374,000
Stock issued under employee stock
option plan and related income tax
benefits 2,170,000
Net income 5,885,000 5,885,000
------------ ------------
Balance - March 31, 1995 11,585,000 35,754,000
Stock issued under employee stock
purchase plan 444,000
Stock issued under employee stock
option plan and related income tax benefits,
net of shares repurchased upon exercise 1,788,000
Net income 7,325,000 7,325,000
------------ ------------
Balance - March 31, 1996 18,910,000 45,311,000
Stock issued under employee stock
purchase plan 536,000
Stock issued under employee stock
option plan and related income tax
benefits 1,185,000
Purchase of common stock (9,461,000)
Net income 8,516,000 8,516,000
------------ ------------
Balance - March 31, 1997 $ 27,426,000 $ 46,087,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 32
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31
--------------------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,885,000 $ 7,325,000 $ 8,516,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,335,000 3,048,000 4,215,000
Deferred income taxes (44,000) (79,000) 420,000
Loss on write down and disposal of property
and equipment 39,000 23,000 96,000
Changes in operating assets and liabilities:
Accounts receivable (2,657,000) (2,526,000) (3,900,000)
Prepaid taxes and expenses 795,000 (363,000) 421,000
Accounts and taxes payable 27,000 700,000 3,546,000
Accrued liabilities 538,000 (382,000) 384,000
Other assets (425,000) (511,000) (1,607,000)
------------ ------------ ------------
Net cash provided by operating activities 6,493,000 7,235,000 12,091,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,219,000) (5,565,000) (5,799,000)
------------ ------------ ------------
Net cash used in investing activities (4,219,000) (5,565,000) (5,799,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds and tax benefits from exercise of
stock options 2,544,000 2,232,000 1,721,000
Purchase of common stock (9,461,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities 2,544,000 2,232,000 (7,740,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 4,818,000 3,902,000 (1,448,000)
Cash and cash equivalents at beginning of year 8,393,000 13,211,000 17,113,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,211,000 $ 17,113,000 $ 15,665,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 33
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: CorVel Corporation (CorVel or the Company) provides
services and programs nationwide that are designed to enable insurance carriers,
third party administrators and employers with self-insured programs to
administer, manage and control the cost of workers' compensation and other
healthcare benefits.
Basis of Presentation: The consolidated financial statements include
the accounts of CorVel and its subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents consists of
short-term highly-liquid investments with maturities of 90 days or less when
purchased. The carrying amounts of the Company's financial instruments
approximate their relative fair values at March 31, 1996 and 1997.
Concentrations of Credit Risk: The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral. No customer represented 10% of accounts receivable at March 31, 1996
and 1997. Receivables generally are due within 60 days. Credit losses relating
to customers in the workers compensation insurance industry consistently have
been within management's expectations.
Property and Equipment: Additions to property and equipment are
recorded. Depreciation and amortization are provided using the straight-line and
accelerated methods over the estimated useful lives of the related assets which
range from three to seven years.
Long-Lived Assets: The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the depreciation and
amortization period or to the unamoretized balance is warranted. Such evaluation
is based principally on the expected utilization of the long-lived assets and
the projected, undiscounted cash flows of the operations in which the long-lived
assets are deployed.
Other Assets: Other assets consists primarily of the excess of the
purchase price over the estimated fair value of the net assets of businesses
acquired (goodwill) and is being amortized using the straight-line method over
periods not exceeding 40 years. Goodwill amounted to $3,636,000 (net of
accumulated amortization of $754,000) at March 31, 1996 and 4,886,000 (net of
accumulated amortization of $898,000) at March 31, 1997.
F-10
<PAGE> 34
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition: The Company's revenues are recognized primarily as
services are rendered based on time and expenses incurred. A certain portion of
the Company's revenues are derived from fee schedule auditing which is based on
the number of provider charges audited and, to a limited extent, on a percentage
of savings achieved for the Company's clients. Accounts receivable includes
$1,527,000 and $1,580,000 of unbilled receivables at March 31, 1996 and 1997,
respectively. No one customer accounted for more than 10% of consolidated
revenues during the years ended March 31, 1995, 1996 and 1997.
Income Taxes: The consolidated financial statements reflect the
application of Statement of Financial Accounting Standards No. 109 - "Accounting
for Income Taxes".
Income Per Share: Income per share is computed by dividing net income
by the weighted average number of common and common equivalent shares
outstanding during the year.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Account Standards No. 128, "Earnings Per Share" (SFAS
128). SFAS 128 redefines the standards for computing earnings per share and is
effective for the Company on March 31, 1998. The Company believes adoption of
SFAS No. 128 will not have a material impact on future earnings per share
calculations.
Stock Option Plans: Effective April 1, 1996, the Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) and accordingly,
is continuing to account for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. The adoption of SFAS No. 123 had no impact on the
Company's consolidated results of operations or financial position.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Office equipment and computers $15,542,000 $19,875,000
Computer software 4,207,000 5,186,000
Leasehold improvements 613,000 784,000
----------- -----------
20,362,000 25,845,000
Less: accumulated depreciation and amortization 8,894,000 12,745,000
----------- -----------
$11,468,000 $13,100,000
=========== ===========
</TABLE>
F-11
<PAGE> 35
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE C - ACCRUED LIABILITIES
Accrued liabilities consists of the following at March 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Payroll and related benefits $2,366,000 $2,891,000
Self-insurance reserves 737,000 599,000
Other 1,143,000 1,140,000
---------- ----------
$4,246,000 $4,630,000
========== ==========
</TABLE>
NOTE D - INCOME TAXES
The income tax provision consists of the following for the three years
ended March 31:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current - Federal $ 3,172,000 $ 4,045,000 $ 4,212,000
Current - State 634,000 718,000 588,000
Utilization of net operating loss (538,000)
----------- ----------- -----------
Subtotal 3,268,000 4,763,000 4,800,000
----------- ----------- -----------
Deferred - Federal (37,000) (102,000) 368,000
Deferred - State (7,000) 23,000 52,000
----------- ----------- -----------
Subtotal (44,000) (79,000) 420,000
----------- ----------- -----------
Utilization of net operating loss carryovers 538,000
----------- ----------- -----------
$ 3,762,000 $ 4,684,000 $ 5,220,000
=========== =========== ===========
</TABLE>
Income tax benefits associated with the exercise of stock options were
$991,000, $4,245,000 and $228,000 for fiscal 1995, 1996 ,and 1997, respectively.
The following is a reconciliation of the income tax provision from the
statutory federal income tax rate to the effective rate for the three years
ended March 31:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at federal statutory rate $ 3,377,000 $ 4,203,000 $ 4,808,000
State income taxes, net of federal benefit 399,000 446,000 423,000
Goodwill amortization 35,000 37,000 40,000
Other (49,000) (2,000) (51,000)
----------- ----------- -----------
$ 3,762,000 $ 4,684,000 $ 5,220,000
=========== =========== ===========
</TABLE>
F-12
<PAGE> 36
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE D - INCOME TAXES (CONTINUED)
Income taxes paid totaled $1,100,000, $1,193,000 and $1,683,000 for the
years ended March 31, 1995, 1996, and 1997, respectively. At March 31, 1994, the
Company had net operating loss (NOL's) carryforwards of $1,600,000 for income
tax purposes. A valuation allowance of $538,000 was recorded in 1994 to offset
the deferred tax assets related to the NOLs. This $538,000 valuation allowance
was applied to additional paid-in capital in 1995 since the related NOLs were
principally attributable to deductions for the exercise of non-qualified stock
options in 1994.
Deferred taxes at March 31, 1996 and 1997 are:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible $ 1,310,000 $ 939,000
Allowance for doubtful accounts 495,000 580,000
Other 227,000 227,000
----------- -----------
Deferred assets 2,032,000 1,746,000
Deferred tax liabilities:
Excess of tax under book basis of fixed assets (1,370,000) (1,504,000)
----------- -----------
Deferred liability (1,370,000) (1,504,000)
----------- -----------
Net deferred tax asset $ 662,000 $ 242,000
=========== ===========
</TABLE>
NOTE E - STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting of its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Under the Company's Restated 1988 Executive Stock Option Plan, as
amended, options for up to 1,535,000 shares of the Company's common stock may be
granted to key employees, nonemployee directors and consultants at prices not
less than 85% of the fair value of the stock at the date of grant as determined
by the Board. Options granted under the Plan may be either incentive stock
options or non-statutory stock options and are generally exercisable beginning
one year from the date of grant and vest monthly thereafter for three years. In
addition to the aforementioned Plan, the Company's President was issued an
option to purchase 750,000 shares of common stock at an exercise price of $.0001
per share in January 1988. As of March 31, 1997, all of these options have
vested and options to purchase 60,000 shares of common stock are outstanding.
F-13
<PAGE> 37
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE E - STOCK OPTION PLANS (CONTINUED)
Summarized information for all of the stock options follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Options outstanding at the
beginning of the year 903,867 827,018 423,411
Options granted 88,850 81,300 126,450
Options exercised (147,421) (468,572) (81,139)
Options canceled (18,278) (16,335) (12,890)
-------- -------- --------
Options outstanding at the end of the year 827,018 423,411 455,832
======== ======== ========
During the year
Weighted average price of options granted $ 22.26 $ 25.19 $ 28.48
Weighted average price of options exercised $ 4.36 $ 2.54 $ 11.71
Weighted average price of options cancelled $ 15.25 $ 18.40 $ 22.80
At the end of the year:
$.0001- $.0001- $.0001-
Price range of outstanding options $26.50 $31.50 $31.50
Weighted average price per share $ 7.38 $15.73 $19.77
Options available for future grants 266,988 202,444 288,884
Exercisable options 622,348 242,575 244,881
</TABLE>
The following table summarizes the status of fixed stock options
outstanding and exercisable at March 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
Weighted Options- Options-
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices Options Life Price Options Price
- --------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$.0001-$.0001 60,000 .76 years $.0001 60,000 $.0001
10.75- 15.00 71,640 .81 years 12.67 69,859 12.72
17.00- 23.00 148,002 2.70 years 21.07 95,299 20.88
25.50- 31.50 176,190 5.11 years 28.33 19,723 27.79
----------------------------------------------------------------------------------
Total 455,832 3.08 years $19.77 244,881 $13.99
==================================================================================
</TABLE>
F-14
<PAGE> 38
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE E - STOCK OPTION PLANS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost for the Company's stock option and stock purchase plans
been recorded consistent with the provisions of SFAS No. 123, pro forma net
income would have been reduced to $7,251,000 and $8,315,000 from $7,325,000 and
$8,516,000 for the years ended March 31, 1996 and 1997, respectively. Pro forma
earnings per share would have been reduced to $1.55 and $1.77 from $1.57 and
$1.82 for the years ended March 31, 1996 and 1997, respectively.
The fair value of each plan is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average assumptions
were used for fiscal 1996: expected volatility of 0.45; risk free interest rate
of 6.4%. The following weighted average assumptions were used for fiscal 1997:
expected volatility of 0.41; risk free interest rate of 6.4%. The assumptions
for both years reflect no dividend yield and a weighted average option life of
three years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjecting assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Because SFAS 123 is applicable only to the Company's options granted
subsequent to April 1, 1995, its proforma effect will not be fully reflected
until 1999. The aforementioned results are not likely to be representative of
the effects of applying SFAS 123 on reported net income for future years as
these amounts reflect the expense for only one or two years of vesting.
NOTE F - EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan which allows
employees of the Company and its subsidiaries to purchase shares of common stock
on the last day of two six-month purchase periods (i.e. March 31 and September
30) at a purchase price which is 85% of the closing sale price of shares as
quoted on NASDAQ on the first or last day of such purchase period, whichever is
lower. Employees are allowed to participate up to 20% of their gross pay. A
maximum of 150,000 shares has been authorized for issuance under the plan. As of
March 31, 1997, 114,141 shares had been issued pursuant to the plan. Summarized
plan information is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Employee contributions $374,000 $444,000 $536,000
Shares acquired 19,634 18,384 23,039
Average purchase price $19.02 $24.15 $23.27
</TABLE>
F-15
<PAGE> 39
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE G - TREASURY STOCK
In August 1996, the Company announced that its Board of Directors had
approved a plan to repurchase up to 100,000 shares, or approximately 2% of the
Company's then outstanding Common Stock. The Company's Board of Directors
subsequently increased the number of shares authorized to repurchase to a total
550,000 shares, or approximately 12% of the Company's stock. Through March 31,
1997, the Company had repurchased 357,000 shares of its common stock for
$9,461,000, at prices ranging from $24.63 to $30.00 per share, with an average
price of $26.50. The stock was recorded as treasury stock, at cost, and is
available for general corporate purposes. The repurchases were financed from
cash generated from operations.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under noncancelable operating
leases. Future minimum rental commitments under operating leases at March 31,
1997 are $4,013,000 in fiscal 1998, $2,896,000 in fiscal 1999, $2,166,000 in
fiscal 2000, $1,194,000 in fiscal 2001, $547,000 in fiscal 2002, and $69,000
thereafter. Total rental expense of $3,559,000, $3,901,000, and $4,573,000 was
charged to operations for the years ended March 31, 1995, 1996, and 1997,
respectively.
The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not result
in any payment that, in the aggregate, would be material to the financial
position and results of the operations of the Company.
NOTE I - SAVINGS PLAN
The Company maintains a retirement savings plan for its employees which
is a qualified plan under section 401(k) of the Internal Revenue Code. Full-time
employees that meet certain requirements are eligible to participate in the
plan. Contributions are made annually primarily at the discretion of the
Company's Board of Directors. Contributions of $157,000, $50,000, and $135,000,
were charged to operations for the years ended March 31, 1995, 1996, and 1997,
respectively.
F-16
<PAGE> 40
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE J - SHAREHOLDER RIGHTS PLAN
During fiscal 1997, the Company's Board of Directors approved the
adoption of a Shareholder Rights Plan. The Rights Plan, which is similar to
rights plans adopted by numerous other public companies, provides for a dividend
distribution to CorVel stockholders of one preferred stock purchase "Right" for
each outstanding share of CorVel's common stock. The Rights are designed to
assure that all stockholders receive fair and equal treatment in the event of
any proposed takeover of the company and to encourage a potential acquirer to
negotiate with the Board of Directors prior to attempting a takeover. The Rights
have an exercise price of $125.00 per Right, subject to subsequent adjustment.
Initially, the Rights will trade with the company's common stock, wand will not
be exercisable until the occurrence of certain takeover-related events. The
issuance of the Rights has no dilutive effect on the Company's earnings per
share.
NOTE K - QUARTERLY RESULTS
The following is a summary of unaudited results of operations for the
two years ended March 31, 1996 and 1997:
<TABLE>
<CAPTION>
Net income per
Gross Net common and common Weighted common
Revenues Margin income equivalent share equivalent shares
----------- ---------- --------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED
MARCH 31, 1997:
First Quarter $26,779,000 $4,856,000 $1,701,000 $.37 4,592,000
Second Quarter 26,863,000 4,989,000 1,818,000 .39 4,661,000
Third Quarter 27,082,000 5,127,000 1,887,000 .40 4,718,000
Fourth Quarter 28,328,000 5,143,000 1,919,000 .41 4,724,000
FISCAL YEAR ENDED
MARCH 31, 1997:
First Quarter $29,851,000 $5,390,000 $2,042,000 $.43 4,759,000
Second Quarter 29,719,000 5,488,000 2,092,000 .44 4,760,000
Third Quarter 30,441,000 5,681,000 2,177,000 .46 4,736,000
Fourth Quarter 31,693,000 5,822,000 2,205,000 .49 4,501,000
</TABLE>
F-17
<PAGE> 41
SCHEDULE II
CORVEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
of Year Expenses Deductions End of Year
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended March 31, 1997: $1,268,000 $1,763,000 $(1,345,000) $1,686,000
Year Ended March 31, 1996: 825,000 500,000 (57,000) 1,268,000
Year Ended March 31, 1995: 725,000 100,000 -- 825,000
</TABLE>
S-1
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Incorporated herein by reference to Exhibit 3.1 to
Company the Company's Registration Statement on Form S-1
Registration No. 33-40629.
Incorporated herein by reference to Exhibit 3.2 to
3.2 Bylaws of the Company the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.1 Lease Agreement of the Company's executive Incorporated herein by reference to Exhibit 10.1 to
office in Irvine, California the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1993.
10.2 Lease Agreement of the Company's office in Incorporated herein by reference to Exhibit 10.5 to
Richmond, Virginia the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.3 Nonqualified Stock Option Agreement Incorporated herein by reference to Exhibit 10.6 to
between V. Gordon Clemons, the Company and the Company's Registration Statement on Form S-1
North Star together with all amendments Registration No. 33-40629.
and addendums thereto
10.4 Supplementary Agreement between V. Gordon Incorporated herein by reference to Exhibit 10.7 to
Clemons, the Company and North Star the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.5 Amendment to Supplementary Agreement Incorporated herein by reference to Exhibit 10.5
between Mr. Clemons, the Company and to the Company's Annual Report on Form 10-K for the
North Star fiscal year ended March 31, 1992.
10.6 Restated 1988 Executive Stock Option Incorporated herein by reference to Exhibit 10.6 to
Plan, as amended the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1995.
10.7 Form of Notice of Grant of Stock Option Incorporated herein by reference to Exhibit 10.7 to
Under the Restated 1988 Executive the Company's Annual Report on Form 10-K for the
Stock Option fiscal year ended March 31, 1994.
10.8 Form of Stock Option Agreement under Incorporated herein by reference to Exhibit 10.8 to
the Restated 1988 Executive Stock the Company's Annual Report on Form 10-K for the
Option Plan fiscal year ended March 31, 1994.
</TABLE>
<PAGE> 43
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.9 Form of Notice of Exercise under the Incorporated herein by reference to Exhibit 10.9 to
Restated 1988 Executive Stock Option Plan the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994.
10.10 Employment Agreement of V. Gordon Clemons Incorporated herein by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.11 Restated 1991 Employee Stock Purchase Incorporated herein by reference to Exhibit 10.11 in
Plan, as amended the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1995.
10.12 Registration Rights Agreement Incorporated herein by reference to Exhibit 10.17
to the Company's Registration on Form S-1
Registration No. 33-40629.
10.13 Form of Indemnification Agreement Incorporated herein by reference to Exhibit 10.19
to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.14 Fidelity Master Plan for Savings Incorporated herein by reference to Exhibits 10.16
and Investment, and amendments and 10.16A to the Company's Registration Statement
on Form S-1 Registration No. 33-40629.
10.15 Stock Purchase and Subsidiary Transfer Incorporated herein by reference to Exhibit 10.18
Agreement to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.16 North Star Indemnification Agreement Incorporated herein by reference to Exhibit 10.20
to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
</TABLE>
<PAGE> 44
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.17 Agreement between the Company and Incorporated herein by reference to Exhibit 10.19
AMAEV/VSB 1990 NV to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992.
10.18 Daniel Davis Severance Arrangement Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1993.
10.19 Form S-3 Registration Agreement with Incorporated herein by reference to the Company's
North Star Universal, Inc. Annual Report on Form 10-K for the fiscal year
ended March 31, 1993.
10.20 Shareholder Rights Plan Incorporated herein by reference to the Company's
Form 8-K filed on February 28, 1997.
11.1 Computation of Earnings Per Share Attached.
21.1 Subsidiaries of the Company Attached.
23.1 Consent of Independent Auditors Attached.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Average shares outstanding 4,140,000 4,417,000 4,587,000
Net effect of dilutive stock
options -- based upon the
treasury stock method 402,000 257,000 102,000
---------- ---------- ----------
TOTAL 4,542,000 4,674,000 4,689,000
========== ========== ==========
NET INCOME $5,885,000 $7,325,000 $8,516,000
========== ========== ==========
EARNINGS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $ 1.30 $ 1.57 $ 1.82
========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation Relationship to Registrant
- ------------------ ---------------------- --------------------------
<S> <C> <C>
CorVel Healthcare Organization California wholly-owned subsidiary
CorVel Health Care Corporation California wholly-owned subsidiary
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 Nos. 33-42554, 33-48186 and 33-42424) pertaining to the
Employee Stock Option and Employee Stock Purchase Plans of CorVel Corporation of
our report dated May 8, 1997 with respect to the consolidated financial
statements and schedules of CorVel Corporation included in the annual report on
Form 10-K for the year ended March 31, 1997.
/s/ ERNST & YOUNG LLP
Orange County, California
June 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 15,665,000
<SECURITIES> 0
<RECEIVABLES> 23,980,000
<ALLOWANCES> 1,686,000
<INVENTORY> 0
<CURRENT-ASSETS> 39,829,000
<PP&E> 25,845,000
<DEPRECIATION> 12,745,000
<TOTAL-ASSETS> 58,824,000
<CURRENT-LIABILITIES> 11,233,000
<BONDS> 0
0
0
<COMMON> 18,661,000
<OTHER-SE> 27,426,000
<TOTAL-LIABILITY-AND-EQUITY> 58,824,000
<SALES> 0
<TOTAL-REVENUES> 121,704,000
<CGS> 0
<TOTAL-COSTS> 107,968,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,736,000
<INCOME-TAX> 5,220,000
<INCOME-CONTINUING> 8,516,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,516,000
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.82
</TABLE>
